Quality Ladder Research Articles

Tariffs and Foreign Direct Investment in a Dynamic North–South Model

AbstractThis paper examines how import tariffs by a developed country (the North) and a developing country (the South) affect innovation and foreign direct investment (FDI) using a quality ladder model. We show that a Northern import tariff raises the relative wage of Northern labor, but impedes innovation and FDI. This may worsen Northern welfare. By contrast, a Southern import tariff raises the relative wage of Southern labor and promotes innovation and FDI. This can improve Southern welfare. These imply that the South has a stronger incentive than the North to impose an import tariff, which is consistent with actual observation.

Climbing the Export Quality Ladder: Role of Human Capital

AbstractThis study assesses the effect of human capital expansion on China's export product quality. It employs the difference‐in‐differences (DID) framework based on a quasi‐natural experiment investigating the 1999 higher education enrollment expansion as the exogenous policy shock. The empirical results confirm that human capital expansion appreciably improved the quality of China's export products. Human capital expansion promoted the transformation and upgrading of old products and the development of new products in term of intensive margin; it strengthened the endowment advantages of incumbent high‐quality export enterprises while preventing low‐quality enterprises from entering the market through price competition on the extensive margin. This prevented quality decline. Further, the study reveals that the improvement effect driven by human capital came from both innovation‐induced and managerial efficiency improvement channels and was more prominent for large or foreign‐funded enterprises in the eastern region. Our findings highlight the role of human capital in China's remarkable export performance from an endogenous growth perspective.

Foreign Competition along the Quality Ladder

Abstract We document that firms with low prices are more impacted by low-cost competition. To explain this pattern, we propose an empirical model of trade with random-coefficient demand and endogenous product quality. Unlike commonly used demand systems (e.g., constant elasticity of substitution, nested logit), this model generates rich substitution patterns and implies an ‘escape-competition’ effect: in response to low-cost competition, firms have an incentive to upgrade their product quality. The estimation of the model reveals significant heterogeneity in consumer preferences. Counterfactual experiments suggest that the ‘China shock’ was significantly more damaging to firms at the bottom of the price distribution, and that quality upgrading had a limited role at mitigating the shock.

South-to-North direct investment in a quality ladders model

ABSTRACT This paper develops a quality ladders model with endogenous technology-sourcing direct investment from the developing South to the developed North. In the model, Southern firms undertake innovation by setting up R&D subsidiaries in the North and transfer the state-of-the-art back to their parents when innovation succeeds. In contrast to previous models, we introduce outward foreign direct investment (FDI) of Southern multinationals, a new channel for international technology transfer from the North to the South, so as to capture the features of active technology seeking of the South. We also apply the model to examine the effects of Southern outward FDI incentives on innovation, production and welfare.

Getting off the ladder: Disentangling water quality indices to enhance the valuation of divergent ecosystem services*

Many water quality valuation studies and Federal cost-benefit analyses build from pioneering work using a "water quality ladder" or a single water quality index (WQI) to characterize both current conditions and effects of policies. When policies lead to contrasting changes in valued ecosystem services like recreational fishing and swimming, analyses using a single ladder or index might obscure important underlying service trade-offs. We test for this effect using alternative approaches that separate water quality indices and value changes in distinct ecosystem services stemming from policies with small to moderate changes in water quality. The indices we test relate to nutrient loadings in Michigan's rivers, lakes, and Great Lakes. Our split-sample experiment compares economic values for treatments with two versus three quality metrics. The key distinction is that the two-index survey, like many existing studies, aggregates subindices for water contact (for swimming and boating) and fish biomass scores (for fishing) into a single WQI, whereas the three-index survey separately utilizes both. We find that changes in our index reflecting changes in fecal bacteria and water clarity are valued differently from changes in our recreational fishing index. Aggregating changes in these two distinct recreational services using a single WQI yields consistently lower benefit estimates across a range of underlying changes in our experiment. In valuation scenarios with small changes in overall water quality, the WQI-based benefit estimates can differ substantially from benefits measured by decomposing the index and valuing the disparate subindices, differences which might change balance of benefits and costs in regulatory evaluations.

Climbing the quality ladder of green innovation: Does green finance matter?

As the second-largest economy in the world with both high-energy consumption and high‑carbon emission, China has launched several green finance pilot zones (GFPZ) targeting regional sustainable development goals (SDGs). Despite critical policy significance, whether and how green finance affects green innovation by enterprises still remains not well understood. Hence, using a difference-in-difference identification strategy and a micro-sample of A-share Chinese listed enterprises during 2007–2019, we investigated the aggregate casual effects of the GFPZ policy on green innovation quality. The empirical results show that the GFPZ policy has incentive and restraint effects on the enterprises' green innovation behavior. It substantially restricts enterprises from engaging in low-quality green innovation and encourages them to spur high-quality ones in the long run. Furthermore, we explore three plausible channels that may explain this beneficial effect; mitigating financial constraints, reducing transaction costs and intensifying peer-to-peer competition in research and development (R&D). In addition, this effect is more pronounced for sub-samples of high-polluting industries, non-state-owned enterprises, and small, medium and micro enterprises. We further show that high-quality green innovation is a plausible mechanism that links green finance with regional green development through enhancing green productivity growth. Overall, these findings provide new insights into the real effects of green finance on green innovation and productivity growth in the context of SDGs.

Climbing the Quality Ladder of Green Innovation: Does Green Finance Matter?

Climbing the Quality Ladder of Green Innovation: Does Green Finance Matter?

Optimal factor taxation in a scale free model of vertical innovation

AbstractThe objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale‐less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where research and development productivity is decreasing in the size of the economy. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital for reasonable parametrizations of the model.

Structural transformation and quality ladders: Evidence from the new Theil's decomposition

This paper examines structural transformation along the development path by linking export concentration to economic development in a cross-country setting. I explore the role of widening product mix, export restructuring and quality upgrading for the patterns of export concentration measured by the weighted Theil index. This study contributes to the literature by developing the decomposition of this index into the extensive, quantitative and qualitative components. I find that structural transformation is primarily driven by export restructuring according to the world demand and towards the products with higher potential to improve quality. Controlling for the world demand, re-specialization is not pronounced at a high level of economic development, while the ability to upgrade quality becomes increasingly important for the higher-middle-income and high-income countries.

How much are Canadians willing to pay for clean surface and ground water? A meta-analysis of the Canadian non-market valuation literature

Three decades of non-market water quality valuation (NMWQV) studies in Canada are analyzed to generate a generic benefits transfer function. Contrary to the large valuation literature focusing on water and wilderness-based recreation in Canada, the number of studies related to water quality is limited. NMWQV studies lack a common design, including consistent adherence to a Canada-specific water quality ladder (WQL). Despite the high degree of data heterogeneity, values extracted from the literature show an increasing step function when relating them to the Resources for the Future WQL. Meta-regression models (MRMs) explain a large share of the variation in value estimates based on the type of water resources, population and methodological characteristics. Baseline water quality and the size of the water quality change are significant determinants of the estimated non-market values. With a relative mean prediction error of no more than 20 percent, the predictive power of the estimated MRMs is high. As such, they are an important step forward in the development of a policy-relevant water quality valuation model. However, there is a clear need for the development of more coherent non-market valuation guidelines in the Canadian water context.

Absorptive capacity and quality upgrading effect of OFDI: Evidence from China

AbstractDoes outward foreign direct investment (OFDI) from developing countries affect firms' competitiveness in international markets through quality upgrading of export? Using highly disaggregated Chinese product level data and the firm level information on overseas investment from 2000 to 2006, we attempt to provide an answer to this question. We employ the propensity score matching approach and difference‐in‐differences specification to deal with the sample selection bias and the potentially endogenous problem in inferring the causal effect of OFDI on quality upgrading. The results reveal that investment abroad could significantly push China export up on quality ladders. The firms with OFDI have higher quality products when compared with the firms remaining invest in their home country at product‐export destination level. This quality upgrading effect is more pronounced where firms export to high‐income countries. Furthermore, we show that the learning mechanism works and the absorptive ability of firms could reinforce the quality upgrading effect of OFDI. The learning mechanism also works for the firms with difference OFDI strategies.

Energy- and Quality-Aware Video Request Policy for Wireless Adaptive Streaming Clients

We present a straightforward, non-intrusive adaptive bit rate streaming segment quality selection policy which aims at extending battery lifetime during playback while limiting the impact on the user’s quality of experience, thus benefiting consumers of video streaming services. This policy relies on the relationship between the available channel bandwidth and the bit rate of the representations in the quality ladder. It results from the characterization of the energy consumed by smartphones when running adaptive streaming client applications for different network connections (Wifi, 4G, and 5G) and the modeling of the energy consumed as a function of said relationship. Results show that a significant amount of energy can be saved (10 to 30%) by slightly modifying the default policy at the expense of a controlled reduction of video quality.

Optimal Factor Taxation in a Scale Free Model of Vertical Innovation

The objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale-less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where R&D productivity is decreasing in the size of the economy. This decreasing productivity removes scale effects, which are a controversial prediction of first-generation endogenous growth models. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital, for reasonable parametrizations of the model. This is true even if the long-run growth rate decreases, with respect to the initial situation in which capital income is not taxed.

Quality competition and environmental damage: is there a role for network preferences?

We consider from a theoretical and empirical viewpoint how network preferences of consumers, which differ in their willingness to pay (WTP) for green goods, affect the equilibrium configuration of a vertically differentiated duopoly when a cleaner firm competes against a dirtier rival. We find that a trade-off can emerge between emissions abatement and the catching-up process of the dirtier firm can emerge. In particular, emissions decrease only when consumers with low WTP have network preferences. Still, in this case, only the cleaner firm has an incentive to improve its environmental quality along the quality ladder, while the laggard firm is tied to its backward profile. These theoretical predictions are empirically tested by exploiting the duality of Italy’s economy, with high-income citizens mainly concentrated in Northern regions, while low-income citizens are largely located in the South. We adopt a fixed-effects spatial error model at the provincial level to relate variables on firms’ environmental management system with citizens’ environmental behaviour, proxied by the recycling rate. Overall, the empirical estimates are in line with the theoretical predictions. From the empirical analysis, it emerges that consumers’ environmental behaviour positively affects enterprises’ future environmental choices. Moreover, firms have a stronger incentive to raise their environmental quality when low-income consumers, namely those buying dirtier variants, internalise the network effect.

A new impetus for endogenous growth: R&D offshoring via virtual labor mobility

AbstractWe develop a simple North–South model of quality ladders to show that the virtual mobility of labor across time zones, facilitated by the advance in communication technology, can raise the endogenous growth rate of the world economy. The unique balanced growth rate is increasing in the endowments of skilled labor in both countries and decreasing in the rate of impatience. Moreover, we find that partial R&D offshoring to the South has initially a negative effect on the level of skilled wages in the North, but this is compensated for by its positive effect on the growth rate in both North and South.

Climbing the Rungs of the Quality Ladder: FDI and Domestic Exporters in Romania

Abstract This article argues that inflows of foreign direct investment can facilitate export upgrading in host countries. Using customs data merged with firm-level information for 2005–11, it shows a positive relationship between the quality of products exported by Romanian firms and the presence of multinational enterprises (MNEs) in the upstream (input-supplying) industries. Export quality is also positively related to MNE presence in the downstream (input-sourcing) industries and the same industry, but these relationships are less robust. These conclusions hold both when the product quality is proxied with unit values and when it is estimated following the approach of Khandelwal et al. (2013).

Structural Transformation and Quality Ladders: Solving the 'Theil's Cube'

We propose a decomposition of weighted Theil index of export concentration into the quantity- and quality-driven terms and calculate the proposed components for 5038 product groups and 120 countries. We link our findings to the debate on the role of quality upgrading in structural transformation. The results do not support the idea that climbing quality ladders (or quality upgrading within the actually exported products) is the best way to proceed with structural transformation: for most countries, the share of the quality-driven component of weighted Theil index doesn’t exceed 20 per cent.

Climbing the Rungs of the Quality Ladder: FDI and Domestic Exporters in Romania

This paper argues that inflows of foreign direct investment can facilitate export upgrading in host countries. Using customs data merged with firm-level information for 2005-2011, it shows a positive relationship between the quality of products exported by Romanian firms and the presence of multinational enterprises (MNEs) in the upstream (input-supplying) industries. Export quality is also positively related to MNE presence in the downstream (input-sourcing) industries and the same industry, but these relationships are less robust. These conclusions hold both when the product quality is proxied with unit values and when it is estimated following the approach of Khandelwal et al. (2013).

Firm Heterogeneity and Export Pricing in India

We examine export pricing by Indian manufacturing firms in the early 2000s using a unique data set that matches firm characteristics with product and destination‐level trade data. We find that, in contrast to China and other countries, firm productivity is negatively associated with export prices, and export prices are negatively associated with distance while positively associated with remoteness. Our conjecture is that Indian innovation costs, which are higher than China's, drive down the scope for quality differentiation causing a negative association between productivity and prices. To the best of our knowledge, this is the first empirical evidence consistent with heterogenous goods and short quality ladders, a theoretical possibility noted in the study by Antoniades (2012), an outcome that arises here because of domestic Indian economic and regulatory features.

Dynamic stochastic games with random moves

We reformulate the quality ladder model of Pakes and McGuire, Rand Journal of Economics, 25(4), 555–589 (1994) as a dynamic stochastic game with random moves in which each period one firm is picked at random to make an investment decision. Contrasting this model to the standard version with simultaneous moves illustrates the computational advantages of random moves. In particular, the quality ladder model with random moves avoids the curse of dimensionality in computing firms’ expectations over all possible future states and is therefore orders of magnitude faster to solve than its counterpart with simultaneous moves when there are more than just a few firms. Perhaps unexpectedly, the equilibria of the quality ladder model with random moves are practically indistinguishable from those of the model with simultaneous moves.